Is it hope, or is it hubris? That's the question wine investors must be asking themselves when they examine the woeful track record of the elite cadre of Wall Street analysts predicting the share prices of the major American winemakers. For the reality is that the performance of the shares of
Beringer Wine Estates
Golden State Vintners
and most recently
remain as capricious as the Napa Valley's own fickle springtime weather.
Take the case of Beringer, whose share price behavior offers some important lessons as to why the wine analysts have about as much collective clout as a box of refrigerator rose.
Beringer went public at 26 in October 1997; peaked above 54 six months later, and has muddled along in the mid-30s to mid-40s ever since. This dismal performance deters nary a wine analyst: Of the nine brokerages issuing recommendations on Beringer, six rate it a strong buy and three a moderate buy, giving it an average recommendation of 1.22 on a scale of 1 (highest) to 5 (an outright sell). Their target prices range from 55 a share (
Hambrecht & Quist
Salomon Smith Barney
) to 60 a share for
Bolstering this rosy view is Beringer's recent operating performance. The company reported a 16.7% increase in gross revenues for the March quarter over the same period in 1998, and boosted its earnings per share to $0.38 a share from $.26 a share in the same time frame. Estimating calendar year 2000 earnings of anywhere between $2.25 and $2.40 a share, the analysts base their target prices on a reasonable multiple of 23 to 26 times those earnings.
So with all this going for it, why have Beringer shares refused to budge from their doldrums? According to several large private investors -- and one hedge fund manager who was long Beringer last fall -- the trouble began on November 3, when
downgraded the shares to buy from strong buy because, it said, Beringer had gotten to within 10% of its target price of $50.
Six days later, the slide continued when
bumped Beringer from its recommended list to a rating of market outperform. (Goldman was the lead underwriter in Beringer's initial public offering.)
Among the investors and the hedge fund manager we spoke with, none has current positions in Beringer, and they unanimously expressed reluctance to get back in because of what they call irrational brokerage actions.
"BT still hasn't upgraded them despite the fall in prices," said the fund manager. "And what's the story with Goldman? They keep talking about how Beringer is moving upscale, and is not so reliant anymore on the cheap stuff, but what did they use to justify their downgrade last fall? A weakness in White Zinfandel!"
What's clear is that the poor performance of wine stocks is due in part to abuse at the hands of some Wall Street analysts, which had cost them the faith of at least this group of savvy valley investors. For in late April, Goldman Sachs elevated Beringer back to its recommended list -- mainly on the strength of its premium wines like Meridian. And Beringer released the stellar quarterly earnings report mentioned above. And what happened? Over the next three days, the stock dropped to 39 3/8 from 44. One of the aforementioned investors said Goldman "upgraded them again on April 27, but that didn't do a damn thing."
The same troubles afflict the shares of many of the leading wine companies. With a few company-specific variations to this theme, analysts and company officials have bemoaned the seemingly inexplicable underperforming ways of Robert Mondavi, Golden State Vintners, Scheid Vineyards and Ravenswood.
Many analysts still trot out the lame excuse that poor performance comes from an article in
last August, despite unequivocal stock-chart proof that the slide began two weeks before the
piece was published. More level-headed analysts like Schroeder's Caroline Levy blame it on investor avoidance of small-cap stocks in general -- with a market cap of $731 million, Beringer's is the largest pure wine play in the industry -- and the peculiarities of the business.
"The complexity of the wine business never ceases to amaze me," she wrote in a bylined article in the April 1999 issue of Wine Business Monthly, "Those with a taste for wine stocks must not only be on top of volume and pricing (the key factors to watch in soft drinks), they must also qualify as weather forecasters, vine counters and mold-savvy pest specialists."
Clearly, complexity is the enemy of stock prices in an industry with so many moving parts: weather, acreage and vineyard pests determine grape tonnage, which determines supply, which, along with consumption, exports, government regulation, health and neo-prohibitionist concerns, determines price and availability. No wonder why even the Wall Street analysts fail to predict the twists and turns of the wine companies' operating performance.
But Levy thinks this woe is compounded by the rudderless nature of the American wine industry. "The wine industry lacks a definitive leader in the public arena," says Levy. "Were Gallo or the Wine Group
America's first- and third-largest wineries, respectively, and both privately owned to list, we believe the investors would become more willing to invest time in understanding the wine business, which would benefit the entire group." Consolidation would be the next best solution, she thinks: The industry remains highly fragmented.
This complexity and lack of focus are why the industry doesn't appeal to most investors who have a limited amount of time to devote to research. Only those interested in the product itself are likely to make the effort required. Thus, it's simply not realistic to think that winery stocks will ever be the sort of broadly held securities that would achieve a reputation for both stability and growth.
It's clear that to attract and keep investors, wine companies must focus investor attention as much on the appreciation of their products -- as
Chalone Wine Group
has done -- as on the appreciation of their share prices.
Lewis Perdue is editor and publisher of
Wine Investment News. While Perdue does not hold any positions in the companies discussed in this column, he is the chief technology officer (on a consulting basis) to the e-tailer Wine Society of the World, which may, from time to time, discuss purchasing or other agreements with wine companies. He can be reached at